New business filing requirements probably don't incite excitement in anyone! Deirdre Harter, CPA, is sharing something that every business owner absolutely needs to know about new business filing requirements that go into effect on January 1, 2024.
Today, Deirdre's bringing you a special episode where she will be zeroing in on a crucial and almost secret deadline that's making waves for business owners and entrepreneurs. It's the introduction of new filing requirements for business entities and yes, even small service-based businesses like yours and mine. So stick around as she breaks down the essentials, shares her perspectives as both a CPA and business owner, and equips you with the knowledge to ensure your business stays on the right side of the law.
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This is Deirdre Harter, and normally we have episodes where it's Carmen and I here on the podcast, but today, I wanted to bring you this special edition because there are some things I've learned about recently in my studies as a CPA.
To keep my license active, I am required to continue my professional education. So I took a webinar on this very subject, and there are quite a few things here that I knew I just had to get out to you all so that you would know what is going on.
Now let's start with who is this for? Well, this new rule affects any business owner who is already incorporated or if you're planning to incorporate in 2024 or even beyond. This includes C-corporations, limited liability corporations, whether you're a single member LLC, or you have a partner, and S-corporations. So basically, if you have registered your business with a state in the United States and gotten those incorporation papers done, this affects you.
So, let's talk about these new rules, and let's go over some of the facts. As of January 1, 2024, there is a government entity called the Financial Crimes Enforcement Network, and they're called FinCEN for short. This is a bureau of the US Department of Treasury, and what they're doing is they're going to require most legal entities, whether domestic or foreign, to report their beneficial ownership information. So why must companies report this beneficial ownership information to the US Treasury Department? And what is a beneficial owner? We're going to break this down a little bit here.
Back in 2021, Congress passed the Corporate Transparency Act, and this law creates a new beneficial ownership information reporting requirement as part of the US government's efforts to make it harder for bad actors to hide or to benefit from their ill-gotten gains through shell companies and other opaque ownership structures. So it's a way to ferret out the people trying to do business in the United States who have US corporations, or have shell corporations. It's all about transparency.
So beneficial owners, we're going to talk about who those are, but let's talk first about how this can impact your business. Existing LLCs, corporations, and business entities, you're going to have to file with this FinCEN Financial Crimes Enforcement Network, and anyone who has incorporated before January 1, 2024. You are required to file this form, this report, by January 1 of 2025. So that is a year's time.
Now, this is only if you have an existing corporation before January 1, 2024. If you are getting ready to incorporate and you do that on or after January 1, 2024, then you will still need to file this beneficial ownership information report, but within 30 calendar days of registration or formation of the entity with the Secretary of State.
That's a huge difference there. So, if you've already incorporated, you have an entire year as of the date of this recording. But if you're going to, let's say that you're going, oh, I think I'm going to incorporate and I'll make my effective date January 1st. Well, you must file this within 30 days of when you do that filing. Now, this reporting rule exempts 23 specific types of entities in certain large corporations. And these are all outlined in what's called the Small Entity Compliance Guide, and that's provided by FinCEN. And we'll put the link in the show notes for you. But I wanted to kind of give you the summary because I've read this guide and I read through what types of entities are exempt, and I can tell you that small business owners and service providers in general are not exempt. Now, there are a few entities I saw on the list that could be an exception. For those of you who are listening that may be you are an accounting firm or you're an insurance agent. But out of that whole list, those are the only two that I recognize as anyone that I know of in our world and in our audience.
I definitely would encourage you to check out the exemptions for yourself. Or you can consult with your CPA. And again, that full compliance guide will be linked in the show notes for you so that you can check it out for yourself. Or you can simply use it as a sleep aid if you read it before bedtime because, as with most regulatory documents, it can be a real snooze-fest to read!
Now, my intention here is to give you the highlights of the new requirement so you can take action. And I want to emphasize here, this is not one of those things you can say, good to know, and ignore it. This is really important because if you do not comply, there are strict penalties that can be imposed for what they call willful noncompliance. And if you have disclosures, if anything is incorrect, or if you've omitted anything and you can be fined.
It can include, but is not limited to a civil penalty of $500 for each day the violation continues. This is huge, people, huge. $500 a day for every day that this is not done. So that's why it's really important for you to be sure that you're going to be taking care of this.
Now, if you are an existing entity and you have a CPA, they should be aware of this and they should be filing this for you, or at least letting you know how to go about filing it for yourself. You want to be sure to ask them about it. I would imagine they will include it when they file your tax return. For example, if it were up to me and I was still preparing tax returns, which I do not, but if I were, that would be the process I would go through. I would make it a part of the whole annual process that we go through in filing your tax return. And I would let you know about this particular report that has to get done, and I would even offer to help do that for you.
However, if you don't have a CPA and you are doing your taxes on your own, you can file this yourself. The forms are supposed to be available after January 1, 2024. And you can go to the website FinCEN.gov.
Now, although you have all of 2024 to file, if you're already incorporated, I would suggest that you file sooner rather than later, simply because you want to make sure that it's accepted. You want to make sure that you don't forget or procrastinate or anything like that.
For those of you who are considering incorporating your business in 2024, please note again that your filing deadline is within 30 days of registering with your state. It is not that whole year of January 2025. So that's something to really take note of.
Now, I'm going to get on my soapbox for just a minute, and I want to tell you my perspective on this. This is going to place a hardship on small businesses. For example, any beneficial owner—and let's define what beneficial owner means—beneficial owners are those that own 25% or more of a company.
So that is, if you are a Solopreneur and you're a single-member, LLC, you own 100%. If you have a partner, maybe you guys are 50/50. It's also anyone who has substantial control over company decisions, even if they don't own shares of the company. Now, I'm not so sure that's going to affect most of us in the service industry that are small business owners. This is really going to impact those corporations where they have a board of directors, where they have C-suite management, and they have people who are making, they have control over company decisions, but they don't necessarily own that 25% of the company. Maybe they have a few shares of stock. So I don't think that for most of us, that's going to apply, but we all are going to be under that beneficial owner because we own our companies.
If you have someone like, let's say that you have a family member and you wanted them to have, let's say you've elected to be an S-corporation and you're the owner and you wanted to give a relative a percentage of the company for profit sharing purposes. Maybe they are not active in your business. Maybe this is being done for legacy purposes. But this is another thing to note. So let's say that you did give more than 25% to someone else as part owner of your company. Whether they're active or not, they're still a beneficial owner, and so they are going to have to comply with this, too.
How do we comply with this?
Well, each beneficial owner must apply for a number, and then the company has to fill out a form with that beneficial owner's information and their number that's going to be given to them by FinCEN.
What are the things that they're going to be looking for?
You have to provide your full legal name, your date of birth, your complete current address, your individual or residential street address if that's different—maybe you have a PO box, but you have to give your residential street address. Basically, so they can come find you if they want to.
Now, the address is not required to be in the United States. So if you have a foreign address, maybe you're in Canada, but you have a business here in the United States, then you're still going to have to report that residential information. It does not have to be US. And then they're going to give you a unique identity number from the issuing jurisdiction, and you're going to have to prove you are who you are. So that means you need a passport and or a driver's license or an identification document issued by a state or local government. And if an individual does not have any of those, then they would need a foreign passport.
So, I personally think this is rather invasive. And there is another requirement that really bothers me in this, and that is that you must report any and all changes of address or name change within 30 days of the change occurring, or again, they're going to penalize you. So this isn't one of those things where you're going to have to put a sticky note up, tattoo this on your arm, something to remember that if you change your address, or if you were to get married and change your name, you have got to report this to that FinCEN organization within 30 days, or they're going to charge you. And I believe it's still going to be that $500 per day. And even if it's not, we still don't want to pay penalties for that.
Another part of this that bothers me, and this is what bothers me the most about how this is all set up, is that no governmental or official entity is going to notify or send reminders to anyone. Not the state that you incorporated in, not the Financial Crimes Enforcement Network, and not the IRS. No one is sending out nationwide pamphlets, at least not that I know of, or taking out advertisements.
I look at a lot of information when it comes to taxes and compliance. I haven't seen this anywhere except the webinar I took through a company that I always recommend to people who are looking to incorporate, they will do the incorporation for you. They're called CorpNet, and it actually came through one of their newsletters. So these governmental entities are relying solely on accounting firms to tell their clients.
I was speaking to a friend of mine who's a CPA just a couple of weeks ago, and she didn't even know about it yet. So, this really concerns me. And I understand. Okay, I get that CPAs need to learn and know this and tell their clients. But what about the business owners who file their own taxes? How are they going to know that this is going on unless they're on someone's email list that happens to know about this or they happen to be listening to this podcast episode?
For all of you who are incorporated, I highly recommend that you go visit Corpnet. I'll put that address in the show notes as well. This is the company that I recommend for incorporation services. They do a great job, they’re reasonably priced, they also help with compliance in all matters, and they send out excellent information in their free newsletter. So, even if you don't need to use their services, definitely go visit them and sign up for their free newsletter because it has really valuable information that you need to know as a business owner and if you're incorporated.
Now, if you are considering incorporating, I highly recommend using CorpNet to prepare your incorporation, because that way it'll get done right, and they're going to be able to help you with this whole beneficial owner information form, and they will remind you, like, once you're a client of theirs, they will send reminders to you.
If you are a sole proprietor and you're thinking after listening to all this; well, I was considering incorporation, but I don't know if it's worth it now. I can assure you that it could very well be worth it. And I know that I've kind of got on my soapbox a little bit about this. I don't like this rule. I don't agree with how they're doing it, but it's beside the point. The law is the law. We have to follow it, and there are all kinds of compliance when it comes to having a corporation. It's not just about this one. There are a lot of different things that are involved depending on the type of entity that you are and whether or not you have to have meeting minutes and an annual meeting. There are a lot of things to it, but there are some significant advantages to doing it as well.
We have a mini-course that will walk you through all of this, through the pros and cons of each type of legal entity. So that would give you the information you need to determine if incorporation is right for you so that you can kind of look at it to see is the compliance part, the work that I'm going to have to do, and it's not a huge amount of work. It's just really a matter of being diligent about it. Is that worth the potential tax savings that I can have in certain types of entities in certain situations?
Depending on what your business is and what your personal taxes look like, there can be some significant tax advantages for you. So anyway, I encourage you to head on over to encoreempire.com/entity. That mini course is there and you could take advantage of that and get the pros, the cons, the down, the dirty, and help that will walk you through making a decision on what's the right way for you to go.
I appreciate you being a part of our audience. Please take action on this today. Again, I can't stress enough, ignorance will not be a reason. There will be no exceptions, and ignorance is not going to be an exception.